A blog about Politics, Economics, and assorted random things I find interesting

10/31/2013

One of the primary reasons that the government manages things so much worse than the private sector is the high total cost added by additional non-value-added activities, and the transactions associated with them.

Consider the following transaction in which you want to buy a loaf of bread. You hand someone money (or credit) and they hand you the bread. Simple, right? The exchange seems straightforward enough. The simplicity of this transaction is misleading because we must, as Bastiat reminded us, endeavor to see "that which is unseen."

A better understanding of the transaction would analyze both sides in greater detail. From the buyer's perspective, what costs were incurred in paying for that bread? Well, if he is a gifted surgeon who COULD be spending that time making hundreds of dollars per hour instead of buying bread, then the cost—opportunity costs—are rather high. It's possible that the brief amount of time retrieving his wallet from his pocket actually costs him more than the bread itself does. The true cost of the bread to the surgeon is the highest value of anything else he could have done with his time and energy. That value is in turn affected by the scarcity of the time and energy due to other demands—and the value added by each of them. This valuation chain is why something seemingly unrelated like an increase in the amount of time spent on medical paperwork can raise the cost of the that bread to the surgeon. The price is the same—but the true economic costs are not.

This reality may be even more apparent when viewed from the supplier's perspective. The store bought the bread from a bakery. The bakery had to hire people to work there, pay their salary and benefits, comply with OSHA requirements and labor regs, FDA inspections, and many other things. But it also had to buy lots of flour and yeast. That flour came from mills who also had similar cost as the bakeries. The mills bought the wheat from a wheat farmer.

That wheat farmer paid for seed and for machinery. He may have had to pay more for seed that was FDA compliant. He may have had to pay more for pesticides because the lower-cost options are not EPA approved. He pays crops insurance (and has taxpayer assistance).

All of these costs drive up the price of wheat to the flour mill. But nothing drove it up so much as an ethanol subsidy that is causing more and more corn to be produced and less wheat. The reduction of wheat supply drive the price far above what it would otherwise be as farmers grow more corn/less wheat to cash in on the ethanol action.

All if these aspects are embedded in the simple exchange of money for bread. Taxes, regulation, subsidy, supervision, are all 3rd party actions of government that distort the market and levy additional transaction costs.

10/29/2013

A bigger problem than the insufficient conservatism of our leaders is the insufficient number of our followers. There aren’t enough conservative voters to elect enough officials to enact a conservative agenda in Washington, D.C. — or to sustain them in that project even if they were elected. The challenge, fundamentally, isn’t a redoubling of ideological commitment, but more success at persuasion and at winning elections.

Among the topics discussed in my Econ 103 (Principles of Microeconomics) class this past Tuesday night was minimum-wage legislation. The minimum wage is, every semester, my chief real-world example of a legislated price floor – a government policy that I discuss immediately after I cover legislated price ceilings such as rent control and the 1970s caps on energy prices.

As always, I informed my students that, compared to twenty or thirty years ago, a smaller portion of economists today agree that minimum-wage legislation harms low-skilled workers.

10/28/2013

It's really simple, actually. Simplicity, however is not ease, and the kind of reform I am proposing would not be politically easy. The toughest part is that it would require educating a lot of Americans who may not be very numerate as to how they will benefit. However, the political difficulty I will not address here; this is just a simple illustration intended to outline how the process can be made to work.

The idea is that the Federal government would hold a reverse auction for Social Security benefit buyouts. Uncle Sam would offer lump sums to people in exchange for the following:

Forfeiture of all future Social Security pension benefits

Must continue to pay all FICA taxes as presently

Must hold lump sum amount in a special account (like a Roth IRA), subject to substantial penalties for disallowed distributions.

That's basically it. To control expenses, Uncle Sam could earmark a certain amount of funds that, once exhausted, would terminate the program for that year.

Let's say we start the first year with a modest budget (for Washington, anyway) of $50 million. The Social Security Administration (SSA) could allow those with a certain number of years of work history (perhaps 5+ years of W-2s) to auction off to the government the rights to their SS benefits. Offers will vary from a couple thousand dollars to perhaps hundreds of thousands of dollars.

A young worker who believes that his pension fund won't exist in 40 years might offer an amount like $5000, since the bird in the hand is so much more valuable. That $5000 at age 25 would be over $51k by age 65 at only 6% (and at 10%--the rough average return of the stock market over time—the amount grows to over half a million dollars). However, the future expense to the SSA of that young worker could be hundreds of thousands of dollars. The government is getting a sweetheart deal, selling the benefits for pennies on the dollar. But the buyer is also getting a good deal. He doesn't know if he will live to ever draw his retirement. He's also getting a hard asset he owns (and can pass along), rather than a potentially empty promise from the government.

Other workers of older age would obviously make much higher offers, because they have far less time. But the amount each person may offer is really irrelevant for two reasons. First, we've capped the annual expense (at $50 million in this case) to the government. Secondly, the program is complete optional. No one will be taking advantage of anyone else. The taxpayer bids, and the government chooses to accept or reject based on its estimates of that person's future pension expenses and their future contributions.

The major downfall of this idea is that it provides a means to solve a problem that nobody in Washington apparently cares about: the massive unfunded liability of Social Security.

Still, it would allow each taxpayer to have the chance to receive a small percentage of something rather than 100% of nothing, which seems like a worthwhile trade.

10/15/2013

People aren’t that stupid. They know a gratuitous abuse of government (lockout) power when they see it. Moreover, Republicans have been passing partial funding bills for such things as national monuments and cancer research, forcing Harry Reid’s Democratic Senate to kill them with a stone-cold heart.

The chosen legislative instrument to begin this transformation was Obamacare. It was presented as an act of charity, a plan to cover the uninsured. That was the “issue” as they presented it. But the actual goal of Obamacare’s socialist sponsors was a “single payer system” – government healthcare — which would put the state in control of the lives of every American, man, woman and child. That is the reason that none of the promises made about Obamacare was true, beginning with his campaign lie that Obamacare government health care was not a program he would support. Obamacare will not cover 30 million uninsured Americans, as Obama and the Democrats said it would; Obamacare will not lower costs, as they promised it would; Obamacare will deprive many Americans of their doctors and healthcare plans, as they assured everyone it would not; Obamacare is a new tax, as they swore it wouldn’t be. All these promises Obama and the Democrats made were false because they were only a camouflage for their real goal actual goal, which was universal control.